Business confidence in the UK is at its lowest point for two years, sparking fears that concern over the credit crunch could push the economy into recession.

According to BDO Stoy Hayward's quarterly Business Trends Index optimism fell for the fourth month in a row in December, with poor retail sales, a slump in the housing market and rising food and fuel costs all hitting business confidence.

The accountancy firm claims further interest rate cuts will be necessary in 2008 if the UK is to avoid a full-on recession.

"Although inflationary expectations remain high, there is evidence that these will ease as 2008 progresses, giving the monetary policy committee some slack to give the economy a boost by cutting rates," said Peter Hemington.